“Sustainability-linked loans—where a loan’s economics are tied to the borrower’s achievements of certain environmental, social or governance key performance indicators—aren’t coming to the loan market. They’re already here,” writes John Czapla (VRC) in an article in Private Debt Investor. The article considers the issues surrounding the widespread use of sustainability-linked loans as pricing and valuation can be complex. Co-author Adrian Lowery, also with VRC, goes on to further discuss market activity in Europe where “the volume of leveraged loans containing an ESG-linked margin ratchet reached three-quarters of the total issuance in the fourth quarter of 2022,” and, in the U.S. market, where issuances were down, it still reached $206 billion in 2022.

Czapla and Lowery say that, as sustainability-linked loans continue to grow in prevalence, private-debt valuation teams will need to refine their approaches to assessing fair value for less liquid SLL loans. To access the article, click here (limited free access).